At entry level, fewer buyers

Kenneth R. Harney - The Nation's Housing

Published Thursday February 21, 2013 at 8:00 pm

Though the housing market is rebounding in many local markets, there is one important segment that is not: First-time buyers are missing in action and represent a smaller proportion of overall sales activity than their historical norm.

Whereas first-timers typically account for roughly 40 percent of sales, lately they've been involved in anywhere from 30 percent to 35 percent, depending on the source of the data.

Lawrence Yun, chief economist for the National Association of Realtors, estimates that there were 2.2 million fewer first-time purchasers in the United States between 2008 and 2012 -- a deficit of about 450,000 a year.

Recent surveys of Realtor members by Yun's research team have found that first-time purchases slipped to just 30 percent during each of the last three months. Mortgage investment giant Freddie Mac reports that first-time purchasers represented just 35.9 percent of loan acquisitions by the firm in 2011. Last year the Federal Reserve found that whereas between 1999 and 2001 about 17 percent of 29-34-year-olds took out a mortgage to purchase a first home, the figure plunged to just 9 percent during 2009-2011.

All of this represents a potentially significant issue for homeowners and sellers in the overall market. Without entry-level purchasers, the housing system doesn't work well. If there's no one to buy moderately priced starter homes, the owners of those houses can't sell and move up.

So what's the problem? Where are these first-timers who should be jumping in while mortgage interest rates are near all-time lows and prices in some markets are still at 2004-05 levels? Recent economic jolts -- the recession and relatively high unemployment rates for younger workers -- are crucial factors. Disproportionate numbers of 20- and-30-somethings have moved back home, living with parents, or they're renting with others, rather than purchasing a house.

Tougher underwriting and qualification requirements by the banks are also important contributors. Fed Chairman Ben Bernanke has said so, and President Obama singled out tight lending standards -- even for borrowers with solid credit -- as an issue in his State of the Union address.

On top of these burdens, though, there's still another financial albatross: Massive student debt levels and their toxic interaction with lenders' stringent rules on "debt-to-income" ratios.

Student loan debt loads have exploded in the past decade and now exceed $1 trillion, according to financial industry estimates. A Pew Research study last fall found that the average student debt balance is $26,682, and that more than one in 10 graduates are carrying close to $62,000 in unpaid student loans. Both numbers are up sharply from just five years earlier.

Lenders and realty agents who work with first-time purchasers say the student debts that many of them bring to the table are often deal-killers because they can't qualify under current debt-to-income limits.

"Even a $30,000 or $40,000 debt can mean you don't make the cut," said Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md. Lenders typically look at two measures of debt-to-income to help gauge creditworthiness: the monthly costs of the proposed new mortgage compared with household income; and total recurring household debts -- credit cards, auto, student loans and the new mortgage. If you have $3,000 a month in recurring debt payments and $6,000 a month in household income, you've got a total debt-to-income ratio of 50 percent.

Under current lending standards, a total debt ratio of 43 percent is about as high as an applicant for a conventional loan can go, absent strong compensating factors such as lots of money in the bank -- something most first-timers sorely lack.

FHA-insured mortgages offer a little more flexibility, says Skeens, who recommends them for buyers with student debts, but usually after the applicants negotiate a deferral of payments if the balances are troublesome.

Paul Reid, an agent with online brokerage Redfin in Irvine, Calif., says it's particularly tough for first-timers right now because even when they qualify for a mortgage, they often get outbid by investors who offer all-cash deals for starter homes. Reid tries to make first-timers more competitive by getting them fully underwritten by a lender before they shop for a house, and then keeping their offers as uncomplicated as possible so as not to put off sellers.

Good advice for first-timers carrying student debt: Check out FHA. Keep your offers simple. And work with an agent who knows how to navigate you through today's perilous underwriting shoals.